Global Reinsurer Capital at Record US$505bn

Global reinsurer capital reached a record US$505bn at the end of 2012, an increase of 11% or US$50bn on the level a year earlier according to an estimate by Aon Benfield Analytics.

The firm’s latest Aon Benfield Aggregate (ABA) study found that capital reported by the ABA group of 31 leading reinsurers increased by 12% US$33bn to US$313bn, driven primarily by US$29.5bn of net income and US$15.9bn of unrealised capital gains. Dividends and share buybacks rose marginally to US$16.1bn. The calculation is a broad measure of capital available for insurers to trade risk with and includes both traditional and non-traditional forms of reinsurance capital.

Further key findings of the ABA study include:

Gross property and casualty (P&C) insurance and reinsurance premiums written by the ABA rose by 6% to US$192bn, principally driven by higher pricing in loss-affected lines and territories, with a number of companies deploying new ‘sidecar’ capacity for catastrophe business (reinsurance sidecars are financial structures that enable investors to take on the risk and return of a group of policies written by an insurer or reinsurer).

The P&C combined ratio stood at 92.6%, down from 105.1% in 2011, representing an underwriting profit of US$11.7bn, with all but two constituents reporting positive results.

The contribution to the combined ratio from catastrophe losses totaled 7.5 percentage points (US$11.9bn), down from 20.0 percentage points (US$29.6bn) in 2011.

The benefit to the combined ratio from favorable development of prior year reserves was 4.3 percentage points (US$6.8bn), down from 5.0 percentage points (US$7.5bn) in 2011.

Pre-tax profits reported by the ABA companies more than doubled to US$35.7bn, the highest level since the onset of the financial crisis in 2008, with all 31 constituents reporting positive results.

The level of ABA engagement with third party capital has increased significantly over the last 18 months. This has mainly manifested itself in sidecar sponsorship and the formation of in-house fund management operations.

“The low interest rate environment not only has impacted what reinsurers earn on their invested funds but it has added significantly to the competitor landscape,” said Mike Van Slooten, head of Aon Benfield’s international market analysis team.

“Diversified yield seeking investors are now adding material pressure (in terms of price and value competition) and benefits (in terms of lower cost underwriting capital) to the reinsurance market. We expect material changes to the capital structure of the largely equity financed reinsurance market as material new flows of capital are integrated into reinsurance underwriting capital.”

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